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Deregulation of mortgages drawing fire Housing advocates say bill in Assembly is bad for consumers; Measure to get second look; Critics say legislation favors loan brokers and banking industry


Consumer and housing advocates for the poor are raising red flags about a complex and controversial bill that would deregulate Maryland's mortgage industry by removing protections for borrowers from the law.

Their concerns prompted Del. Gerald J. Curran, chairman of the House Commerce and Government Matters Committee, to postpone a vote on the bill Friday. He made that decision after meeting Thursday with a representative of St. Ambrose Housing Aid Center, a Baltimore advocacy group.

Curran, a Baltimore Democrat, said he wanted his financial institutions subcommittee to reconsider House Bill 94, which the panel approved last week.

"When I began to focus on this, there were some unanswered questions that needed to be addressed -- and will be addressed -- before it comes out of committee," Curran said.

The subcommittee is expected to meet early this week, and Curran said he intends to be there. A full hearing on Senate Bill 441, the companion to the House bill, is scheduled for tomorrow in the Senate Finance Committee.

The House bill -- a potpourri of proposed changes in laws governing the regulation of second mortgage brokers and lenders -- was introduced by Curran on behalf of H. Robert Hergenroeder Jr., a former banker and House member who is the state's commissioner of financial regulation.

Hergenroeder said the purpose of the legislation was "to enhance the consumer protection provision of Maryland's current mortgage-lending law, while enacting new pro-business initiatives and increasing regulatory powers."

But housing activists maintain the legislation is tilted far more toward the mortgage-lending and banking industries than toward the borrower.

"I wouldn't say there was nothing in the bill that was pro-consumer, but the bill is decidedly anti-consumer," said Kimberley A. Propeack, a St. Ambrose lawyer.

As the commissioner of financial regulation -- a post created after the positions of state banking commissioner and commissioner of consumer credit were merged last year -- Hergenroeder worked through the summer with mortgage-lending and banking industry representatives to propose an overhaul of the law.

Consumer input delayed

Hergenroeder acknowledges that he did not invite consumer advocates to join the discussion until December, when the resulting bill had already been filed. Their earlier exclusion raised the ire of Del. Elizabeth Bobo, a Howard County Democrat who was the subcommittee's sole vote against the bill.

"I'm concerned about the role of the commissioner of financial regulation in this bill, that he would support such anti-consumer legislation," Bobo said. "His job is not to draft legislation for the industry."

She said she was heartened by Curran's decision that the panel should reconsider the legislation.

"The chairman's decision to bring it back to the subcommittee tells me he doesn't want it to pass in the form that the subcommittee recommended, and I think that's a good thing for the consumer."

Among other things, the legislation would:

Explicitly state that a mortgage broker -- the "middleman" between a borrower and the lenders who might issue a mortgage -- has no fiduciary duty to act in the best interest of the borrower. The bill also would require that borrowers be informed of this.

The brokers say this merely clarifies existing state law by explicitly stating that they have no such duty to the borrower. And they say the language is necessary to protect brokers from lawsuits by borrowers who believe they did not get the best mortgage deal.

"We're afraid of class-action attorneys who have filed these class-actions in other states," said Alan T. Fell, the state's former commissioner of consumer credit who is a lobbyist for the Maryland Association of Mortgage Brokers.

Housing advocates, however, maintain the broker's duty to the borrower is implicit in current Maryland law. And they say this provision of the bill is terrible for consumers -- especially because Maryland allows brokers to receive a fee from the lender who issues the mortgage.

"If this becomes law, the mortgage brokers -- the person you expect to be helping you -- will actually be able to conspire with the lender against your interests," said Propeack, the St. Ambrose attorney. "For a simple disclosure, they'll be able to shop on the market for the most expensive mortgage to saddle you with."

Eliminate the two-point (2 percent) ceiling on the amount a broker can charge a borrower as a loan-origination fee. The legislation as introduced -- and as it stands in the Senate bill -- would remove the ceiling altogether. The House subcommittee, however, agreed to raise the ceiling to five points.

The industry maintains that removing the ceiling is necessary for Maryland to remain competitive with other states in attracting and keeping mortgage lenders. Housing advocates, however, say a limit is necessary to prevent fly-by-night brokers from taking advantage of homeowners.

"If you remove the cap altogether, you're going to see abuses by certain types of brokers and lenders," said James A. Mayhew, another St. Ambrose lawyer.

Eliminate licensing and regulation by Hergenroeder's agency of mortgage-lending subsidiaries of banks, so long as those banks have a branch in Maryland.

'Less control' for state

Hergenroeder and lobbyists for commercial banks with the mortgage-lending subsidiaries maintain that state regulation is redundant, because a variety of federal agencies regulate banks.

"It is true they are regulated and audited by federal institutions, but it still gives the state less control over these institutions," said Cheryl L. Hystad, a University of Baltimore law professor who sits on the St. Ambrose Legal Services Advisory Board. "It's a question of policy whether they want to give that up."

The bill does contain several provisions applauded by the housing advocates. It would increase penalties against unscrupulous lenders and increase the bonding, or insurance, they must carry to protect their customers.

Testifying in favor of the bill has been a handful of lobbyists, some of whom are among the most successful in Annapolis.

Representing Maryland Bankers Association Inc. are John B. Bowers Jr., D. Robert Enten and Marjorie A. Corwin. Lobbying for the Maryland and Washington mortgage bankers is Dennis F. Rasmussen, a former Baltimore County executive and state senator.

And, in addition to Fell, the Maryland Association of Mortgage Brokers is being represented by J. Steven Lovejoy, a former assistant attorney general who was once assigned to Fell's agency.

Each has a separate issue in the bill. The mortgage brokers want to be explicitly free from the fiduciary duty to borrowers. The mortgage bankers, lenders and finance companies want the two-point ceiling removed. And the commercial bankers want to be out from under the state regulators.

Pub Date: 2/17/97

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